The Erosion of Retiree Health Benefits and Retirement Behavior: Implications for the Disability Insurance Program

By Fronstin, Paul | Social Security Bulletin, January 1, 2000 | Go to article overview

The Erosion of Retiree Health Benefits and Retirement Behavior: Implications for the Disability Insurance Program


Fronstin, Paul, Social Security Bulletin


Summary

The effects of retiree health insurance on the decision to retire have not been examined until recently. It is an area of increasing significance because of rising health care costs for retirees, the uncertain future of Medicare, and increased life expectancy. In general, studies suggest that individual retirement decisions are strongly responsive to the availability of retiree health insurance.

Early retiree benefits and retirement behavior are also important because they may affect the Social Security Disability Insurance (DI) program. It is not apparent that if a person loses retiree health benefits, or if fewer people are eligible for retiree health benefits in general, claims for DI will increase. The potential 2-year loss of health benefits may be a deterrent to leaving the labor force and claiming DI, although persons who are unable to work would leave the labor force even without health benefits.

In order to understand how the decline in retiree health benefits may affect enrollment in DI, analysts must at least incorporate the role of coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). That act provides many people with access to health insurance during the 2--

year gap between eligibility for DI and Medicare. In fact, persons with sufficient means to retire early could use the income from Disability Insurance to buy COBRA coverage during the first 2 years of DI coverage.

Determining the effect of the erosion of retiree health benefits on DI must account properly for the role of other factors that affect DI eligibility and participation. The financial incentives of Social Security, pension plans, retirement savings programs, health status, the availability of health insurance, and other factors influencing retirement decisions must be taken fully into account in order to isolate the precise effect of retiree health benefits.

Introduction

Retirement-defined here as complete withdrawal from the labor force-can best be defined as a process rather than as a single event (Quinn and Kozy 1996). The process generally begins with the termination of career employment and frequently includes periods of postcareer employment, part-time work, partial retirement, and temporary retirement (Ruhm 1991). Workers often use one or more transitional stages, or bridge jobs, between their career job and retirement. One common transitional stage is movement from full-time to part-time work. For wage and salary workers, the move usually entails switching jobs, but it is sometimes accomplished by remaining in their current jobs on a part-time basis.

The process of retirement varies with individual preferences, predicted future earnings, pension accruals, Social Security benefits, health, and preferences for leisure. It may be made by weighing the combined benefits of the wages from continuing to work and the potential increase in future income from accruing greater pension benefits against the costs of forgoing the increased leisure of retirement and future pension accruals. To be realistic, the decision should account for risks, including uncertain future income, inflation, and premature death.

Health insurance coverage may also be a factor in the retirement decision. Employer-sponsored health insurance can represent a significant source of income security for early retirees because Medicare-the federal health insurance for retired persons-is not available to people under age 65 unless they are disabled. Although early retirees as a group are probably healthier than those age 65 or older, the risk of medical need increases with age. Early retirees without health insurance may be vulnerable to costly medical expenses. Individually purchased health insurance can be expensive, may restrict coverage for certain services, and may be unavailable for those with preexisting conditions who lack prior creditable health insurance coverage. …

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